Danske Daily: Canadian Banks Downgraded, Yen Rises Then Weakens

Moody's downgrades six Canadian banks but investor confidence remains intact.

Mario Draghi was in Italy yesterday to discuss supervision of Montei dei Paschi.

The yen rose overnight on profit taking but has weakened again this morning.

Markets Overnight
Moody’s has downgraded six Canadian banks because of high levels of consumer indebtedness and elevated housing prices. Toronto-Dominion Bank has lost its ‘AAA’ rating and is now rated ‘Aa1’. Investors still view the Canadian banks as strong and Canadian bank shares gained slightly yesterday. The Canadian dollar is trading close to a six-month low on signs of economic weakness.

ECB president Mario Draghi had an unannounced meeting yesterday with Italy’s finance minister Vittorio Grilli about the growing scandal in the Italian bank Montei dei Paschi, which last week received an additional EUR500m bailout because of losses on a handful of derivative contracts. Mario Draghi was governor of the Italian central bank in 2010 when inspection visits first revealed the problems in Montei dei Paschi. The scandal and bailout could become a problem for Mario Monti in the upcoming elections.

The government of Cyprus has apparently received the Eurogroup’s support for its request to the Russian Federation for a five-year extension of a EUR2.5bn loan according to Dow Jones Newswire. The Eurogroup and in particular Germany remains reluctant to give Cyprus much needed aid.

Financial Times is running a story on EUR100bn in private funds flowing back to the euro area periphery countries late last year as sentiment improved following ECB’s OMT announcement in September. This is an important reversal of the previous capital flights.

The Reserve Bank of India cut the repo rate by 0.25% to 4.0% this morning.

US Treasury 10-year yields briefly touched 2.0% Monday afternoon but then fell back and traded at 1.97% when the US session ended. Two-year yields rose slightly but then fell back and closed at 0.28%.

In equity markets, the US session showed little direction with S&P500 and Dow Jones closing down 0.1% and Nasdaq up 0.15%. In the Asian session Nikkei has gained 0.5% while Hang Seng is trading in slightly negative territory.

In the FX markets, the yen rose against the majority of other currencies as investors took profit on technical indicators that it may have dropped too quickly and traded below 90.5 during the night. This morning the yen has weakened again and was briefly trading around 91.0. The British pound fell on concerns about the UK’s economic weakness and the risk of a triple-dip recession. The Brazilian real rallied after central bank intervention in the form of foreign exchange swap action took traders by surprise.

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